The global economy is typically judged in monetary terms through the valuation of goods and services, and the fluctuations in each country’s markets. The survival of such an economy depends on having an open-market policy in every country to support the influx and outflow of investments, and sustainable growth through sound fiscal policies.

Apart from strong fiscal policies, capital markets require a common set of financial reporting standards that not only provides a clear picture of the companies doing business across geographies, but is also understood by the global investor community.

Ever since companies began expanding overseas, they have struggled to find a common platform for reporting their consolidated operations, or provide investors and markets with financial information that is consistent across geographies and cultures. With increasing cross-border trade and companies raising capital in foreign markets, a single set of financial reporting standards is clearly the need of the hour.

The International Financial Reporting Standards (IFRS) were designed as a common global financial reporting language, so that a company’s accounts are understood and comparable across countries. The work that the International Accounting Standards Board (IASB) began over a decade ago to create a financial reporting framework through IFRS — starting with the European Union and a few other countries — has now caught the attention of the world. Over 100 countries are following these standards and several others, including Japan and the US, are evaluating them for use in their domestic companies. India has also made some progress towards IFRS convergence by developing a set of standards that are based on IFRS as applicable in 2011, albeit with several carve-outs. It is expected that these draft standards will continue to be updated and remain closer to IFRS when they are finally made applicable.

So, do we have a common set of global accounting standards through the advent of IFRS? Research by various agencies and academics seems to suggest that a majority of nations have either adopted IFRS as their national reporting standards or are in the process of doing so. There are still some large economies that have not fully adopted IFRS, but foreign companies doing business or trying to raise capital in these economies have the option of using IFRS. The most significant move was the US Securities Exchange Commission’s (SEC) decision in 2007 to permit non-US companies to use IFRS for their US listing requirements. Currently there are more than 450 Foreign Private Issuers that are reporting to the SEC under IFRS.

The US body Financial Accounting Standards Board (FASB) has also embarked on a convergence programme with IFRS. It has been clear in the past that complex areas such as business combination, stock option compensation, derivatives and hedging have more or less aligned under IFRS and US GAAP (generally accepted accounting principles), and efforts are underway to achieve convergence on revenue recognition and leases. The SEC has also been evaluating the use of IFRS or its incorporation into US GAAP for use by domestic companies, and one can say that the first step has been taken towards convergence and the use of IFRS for US-listed foreign companies. This gives non-US companies access to a market that is both liquid and prestigious.

However, one should not assume that a common set of accounting principles will achieve a utopia of consistent and transparent reporting. This point is best illustrated by the example of the SEC which has, over the last few decades, created a strong regulatory environment and has the most stringent reporting requirements for companies listed with US exchanges. The SEC staff report in 2010 noted that it had conducted a review of around 4,500 existing issuers, resulting in restatement of around 15 per cent of those issuers. This clearly demonstrates that even in a mature and sophisticated regulatory environment like in the US, it is a challenge to apply accounting rules consistently.

So, what is required for the consistent application of a global financial reporting framework, especially a principles-based one? The answer is two-fold. First, companies should strengthen corporate governance in financial reporting. The need to have independent directors and Board members is stronger now than ever, as is the need to have financial experts on such committees to review financial information consistently. Secondly, global standards should be enforced with appropriate regulation and independent audits, combined with global collaboration amongst regulators. Regulation alone cannot stop the abuse of financial reporting standards; safeguards should be built into the financial reporting framework to ensure companies have the ability to apply such standards.

The author is Partner, Assurance, Grant Thornton India LLP

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